What is FF&E When Buying a Business?

Furniture, Fixtures, and Equipment (FF&E) is the movable property companies use in business operation. FF&E can be office furniture, fixtures that won’t damage a building structure when removed, and equipment such as computers needed to conduct day-to-day operations.

Note that the term FF&E is used in different service industries for various purposes but it generally talks about the same items. Accountants are known to refer to FF&E as long-term tangible assets (assets that last more than a year, which you can physically touch) that they value on a company’s balance sheet and use for tax purposes.

Furniture includes more substantial items such as movable office furniture. Fixtures are anything that may be secured, such as cubicle partitions or attached shelving that has no permanent connection to the structure or building.

For instance, a bookshelf might be secured to a wall to prevent it from toppling over, but its removal won’t damage the building structure. A faucet or toilet, however, would be considered a part of the building or premises itself and would not qualify as a fixture in terms of FF&E. Equipment may refer to anything tangible a business uses for its operations such as computers, audiovisual equipment, phones, copy machines, wiring and devices, and any other industry-specific equipment.

FF&E are considered vital to support operations and cannot be disposed of without impairing the company’s ability to conduct business. The book value of FF&E assets more or less has no bearing on the assets actual useful life. This is because many business owners use aggressive depreciation schedules to recover costs quickly.

Moreover, the assets may remain in service long past their full depreciation. Hence, for the purposes of business valuation or when buying a business, the value of FF&E assets is expected to be determined based on their true economic potential, not book value.

By convention, the value of FF&E assets tends to be included in the business value estimated by the market methods. This corresponds to the typical business sale transaction in which these assets are transferred from the seller to the buyer. The value of FF&E is also included in the business value determined by the income-based business valuation methods such as Multiple of Discretionary Earnings and Discounted Cash Flow methods.

Facts about FF&E to Note When Buying a Business

The overall definition of FF&E is that if you remove it, it won’t damage the permanent structures and fixtures of a building. The kitchen sink, the toilet, and the faucets belong to the building, but FF&E belong to the business. NHere are other things relating to FF&E to keep in mind when buying a business.

1. FF&E Purchasing

FF&E purchasing, also known as FF&E procurement, is when a business furnishes and equips its business space. Note that the business owner of a small business might purchase FF&E without assistance. But larger companies and public agencies tend to hire FF&E procurement agencies, interior designers, furniture dealers, or architects for FF&E selection or buying services.

Bigger corporations and public agencies are known to outsource FF&E purchasing because it’s easier and more efficient than doing it themselves. FF&E procurement companies are tasked with purchasing, delivering, and installing the correct items to a company’s specifications, and making any corrections for things that go wrong, such as faulty equipment or furniture that is substandard.

For instance, a new hotel tends to require many different types of furniture, such as beds, desks, and chairs. It would also have to acquire fixtures like lamps and curtains as well as equipment such as telephones, TVs, and safes.

Rather than dealing with a bunch of different vendors for these items, it’s easier to hire a company to do it. Have it in mind that an FF&E Procurement Company could coordinate purchases, delivery, and installation to coincide with the hotel’s opening schedule.

2. FF&E Specifications

FF&E specifications are more or less the thorough descriptions of each item of furniture, fixture, or piece of equipment that a business wants to purchase. Whether a company uses its purchasing department or outsources the purchasing of FF&E, it is expected to describe the types of items it intends to acquire in detail.

Note that a company might create FF&E specifications through a contractor, architect, interior designer, FF&E procurement agency, or the company’s internal purchasing department. FF&E specifications have different categories. Some common specification categories are:

• Proprietary specifications: Proprietary specifications are more or less a specific type of manufacturer, model number, or brand and do not allow for substitutions. Proprietary specifications are ideal when a company wants to add similar or exact FF&E items to those it already has.
• Prescriptive specifications: Prescriptive specifications tend to require a particular brand or trade name for the items.
• Performance specifications: Performance specifications extensively explains the operational requirements or the results expected from the items, such as what functions an item must perform after being installed.
• Base bid specifications: Base bid specifications may request a specific material or product type but allow for substitutions that the purchaser believes are equal in quality, materials, design, or type.
• Descriptive specifications: Descriptive specifications describe an item in terms of materials, design, and quality but do not advise of any particular brand or trade name.
• Reference standard specifications: Reference standard specifications refer to specific materials, products, or pieces of equipment based on the requirements set by certain authorities such as state and federal standards.

3. FF&E Depreciation

For accounting purposes, FF&E is categorized on its own line item under PP&E (property, plant & equipment) on a company’s balance sheet as long-term tangible assets or “fixed assets.” In accounting, “long-term” tend to mean more than one year, and FF&E assets are known to have a lifespan of at least three years or more and depreciate over their lifespan.

Depreciation simply means a decline in the value of an asset over time. Accountants are expected to determine the depreciation of FF&E assets to be able to quantify their value as an expense over the period of years that make up their useful life.

Depreciation is indeed a way to extend the value of a fixed asset over time so that a fixed asset’s expense matches the revenue it helps to generate in a given accounting period. According to the IRS, FF&E items are expected to meet the following requirements to be depreciable:

• The business must own them.
• The business must use them for income-producing activity.
• They must have a set useful lifespan.
• Their expected lifespan must be more than one year.

In the United States, the most common method of depreciation is the straight line depreciation method. The straight line method deducts depreciation in equal annual amounts over the lifespan of a fixed asset. Note that to use the straight line method, you have to first find out the amount it costs to purchase the item (adjusted basis).

Then, subtract the salvage value of the item (how much the thing is worth after its useful lifespan). Note that the IRS states that companies should estimate the salvage value of a fixed asset based upon how long its life spans are. After that, divide that figure by the number of months or years of an item’s useful lifespan.

For instance, let’s imagine a company acquires a new office server for $40,000. According to the IRS, Mainframe Computer Systems and Servers have a useful lifespan of seven years (84 months). The company estimates that the salvage value of the server is 10% of its purchase price. The depreciation formula would be something like this:

$40,000 – (10 percent X $40,000) / 84 months $40,000 – ($4,000) / 84 months $36,000 / 84 months = $428.57 per month or $5,143 per year (rounded to the nearest dollar)

Since the useful lifespan is seven years, an accountant is expected to deduct $5,143 from the value of the server each year for seven years on the balance sheet, until reaching the salvage value. Note that once the server equals the salvage value, it stays at that value on the balance sheet until it is discarded or sold.

Conclusion

Furniture, Fixtures, and Equipment (FF&E) just like it was stated above is the property a business owns and uses in day-to-day business that is not attached to the building. It includes movable furniture and furniture that may be fixed to a wall, like a bookshelf, but that won’t damage the structure of a building if removed.

It also includes any equipment such as computers used in a Business. Generally, if an item is essential to a business’s operations, and you can carry it out of a building when you leave, it’s most likely FF&E.